Australia sees wider budget deficit, weaker growth ahead

Rising govt spending, China slowdown among concerns

Australia's budget is expected to slip deeper into deficit in the years ahead due to rising government spending and a weakening in key trade partner China, a mid-year fiscal update showed, with a national election due in less than six months.

While the budget shortfall is forecast to narrow slightly in the current fiscal year to A$26.9 billion (S$22.9 billion), it then widens to A$46.9 billion in 2025-26, or 1.6 per cent of gross domestic product, and holds at or above 1 per cent of GDP in the following two years, according to the Mid-Year Economic and Fiscal Outlook released on Dec 18.

The anticipated deterioration in the books is a blow to Treasurer Jim Chalmers, who has sought to construct a Labor government narrative of sound economic management ahead of an election that must be held by May 17.

The Treasury has also edged down expectations for economic growth this fiscal year and the next as elevated interest rates drag on private-sector activity.

"The market was pretty well prepped for the wider deficit scenario and this came within expectations," said Mr Damien McCoulough, head of fixed income research at Westpac Banking Corporation in Sydney.

"Given there was some risk of an election-style big spending shift, there is probably some relief that the worst-case scenario did not eventuate."